What Trustees Need to Know About Constructive Trusts

Trustees are the ones who will administer a trust and are responsible for seeing to it that the provisions in the trust agreement are complied with. As a trustee, it is important to understand what constructive trusts are and how they work. The purpose of this type of trust is to remedy a situation where someone may be receiving property they should not be receiving. Here is what you need to know.

What is a Constructive Trust?

A constructive trust is different from a typical trust. It is not meant to represent the expressed intentions of the person who creates the trust. Instead, this type of trust is used by the courts when the incorrect person has been given the title to trust property. In other words, a constructive trust is meant to be a remedy for a mistaken transfer or trust property. A constructive trust is not a real trust as it is commonly understood. Instead, it is a temporary arrangement created for the sole purpose of transferring the title of the subject property to the correct beneficiary.

Common Reasons Constructive Trusts are Necessary

In situations where title to estate property has been given to someone who, for whatever reason, should not have received the property the court will correct that situation by establishing a constructive trust. There are several different reasons why court intervention of this type may be required. Typically, it is because of either a mistake made by the trustee who tried to administer the trust or some type of unconscionable conduct.

What is the Legal Basis for Creating a Constructive Trust?

The creation of constructive trusts is based on the legal theory that any individual who has become the owner of certain property who which they should not have title has a duty of fairness to transfer ownership of that property to the person to whom it rightfully belongs. Failing to do so, by being allowed to retain the property, would result in that person being “unjustly enriched.” The person to whom the property should belong has the option of a constructive trust or some monetary or injunctive relief. However, they cannot have both.

When the Use of a Constructive Trust Would be Appropriate

There are various different reasons why a constructive trust may be necessary to remedy the improper or unlawful ownership of trust property. Some of those reasons include:

Mistake

Undue Influence

Duress

Fraudulent Misrepresentation Or Concealment

Property Obtained By Homicide

Gift By Will Or Intestacy Based Upon Broken Promise

Breach Of Express Trust By Disloyalty

Breach Of Duty In Direct Dealing With Beneficiary

As a trustee, if you administer a trust and find that any of these situations exists, you can contact one of our trust attorneys for advice.

Undoing a Gift by Will or Intestacy Based Upon Broken Promise

This situation refers to a property owner being induced to make a gift of property to someone in reliance on an oral promise that the assets being used in a particular way. The person who received the property then breaks that promise. Another example of this is when a person is persuaded not to leave a will or other estate planning document based on the promise of another to distribute the property in the manner the property owner desires. In this situation, the court may decide to create a constructive will in order to get the property in the right hands.

Breach of Duty in Direct Dealing with a Beneficiary

A trustee of a trust has certain duties to beneficiaries when they administer a trust, including making complete disclosures and treating each beneficiary with complete fairness if there are direct conveyances, contracts or other financial or property transactions involved. The trustee’s duty extends to every person who serves as a fiduciary or has a confidential relationship. The reasoning is that people in fiduciary positions, serving as trustees are in a position of superiority and dominance so there is a risk of overreaching and undue influence. These are issues for trustees to consider when they administer a trust.

Requesting Professional Advice Regarding Trust Administration

In the face of the significant responsibility placed upon a trustee, it is very common for trustees to need advice or assistance from a professional as they carry out certain aspects of their responsibilities. This is most likely the case when it comes to investing the trust property. If you do not have experience with investments then it would be wise to seek the advice of a professional. The management of investments is the probably the most frequently litigated issue when you administer a trust.

Download our FREE estate planning worksheet today! If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.

A graduate of Boston University School of Law, Scott P. Schomer is a frequent lecturer on estate planning and elder law issues, having discussed these important issues on local and national television. A seasoned courtroom advocate, Scott has obtained combined judgments and verdicts in excess of twenty-five million dollars for his clients. Scott has served as a member of the Los Angeles Superior Court Probate Volunteer Panel (PVP Attorney), Probate Settlement Panel and a Judge Pro Tempore. Scott's expertise has been recognized by his peers with such accolades as a life-time membership in the Multi-Million Dollar Advocates Forum, the Five Star Wealth Manager designation, and repeated nominations as California Super Lawyer.

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